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Model Risk in Pricing Path-dependent Derivatives: An Illustration

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  • Virmani, Vineet

Abstract

Model selection and model uncertainty go hand-in-hand. However, while there is uncertainty associated with the selection of any model, the context is paramount. This study is an illustration of issues surrounding model risk when pricing products whose payoff depends crucially on forward volatility. In particular, we try and quantify model risk associated with pricing of cliquet options using stochastic volatility models.

Suggested Citation

  • Virmani, Vineet, 2014. "Model Risk in Pricing Path-dependent Derivatives: An Illustration," IIMA Working Papers WP2014-03-22, Indian Institute of Management Ahmedabad, Research and Publication Department.
    • Handle: RePEc:iim:iimawp:12837
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